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What an SEC Fiduciary Rule Could Mean for Advisors

How a uniform standard could make things easier for advisors

Aron Szapiro


The Securities and Exchange Commission has been rumbling about developing its own fiduciary rule since Chairman Jay Clayton requested public feedback on the topic last summer. Under the 2010 Dodd-Frank Act, the SEC has had the authority to set a best-interest standard of conduct “for all brokers, dealers, and investment advisers, when providing personalized investment advice.”

Now, those rumbles about an SEC fiduciary rule are getting louder. According to recent media reports, a proposal may arrive by the middle of this year.

This news comes as the Department of Labor’s fiduciary rule has been in partial effect since June 2017. Under the DOL rule, many more people are now fiduciaries and expected to act in their clients’ best interests. However, there’s no enforcement mechanism. That’s because the main guts of the rule are postponed until July 2019. The rule will likely be modified. And if the SEC acts soon, perhaps the Labor Department will align its rule with the SEC’s.

So, what can we expect from the SEC and its fiduciary standard? Let’s look at who it might cover, how it could be enforced, and some potential disclosures and requirements.

Don’t get too excited: The SEC can’t make standards fully uniform

One common assumption is that the SEC has the authority to regulate retirement and non-retirement accounts—leading to a uniform standard for everyone giving financial advice. Registered investment advisors (RIAs) would like to believe they would have only one standard of advice to follow, as opposed to the Labor Department’s standard for IRAs and less stringent SEC standard for taxable accounts. Similarly, as things stand, broker/dealers would follow the Labor Department’s standard for IRAs and Financial Industry Regulatory Authority (FINRA) rules for taxable brokerage accounts.

Here’s the good news: It’s true that the SEC could normalize treatment between taxable and nontaxable accounts for RIAs and broker/dealers giving advice to retail investors, assuming the Labor Department aligns its rule with the SEC’s.

However, advisors working with 401(k) plans who are fiduciaries will still need to follow a very high standard of care found in the Employee Retirement Income Security Act of 1974 (ERISA) and related case law. This is true even if the Labor Department revises the definition of who’s a fiduciary, perhaps even ceding the standards of advice for IRA investors to the SEC.

After all, Congress designed ERISA to have a higher standard of care for people investing through workplace retirement plans, and those standards are not going anywhere.   

State laws further regulate many financial advisors, including smaller RIAs and insurance agents. Some states have already floated higher standards, including New York, where one proposed regulation would tighten standards for insurance agents selling investments. So, there could be even more flavors of fiduciary standards rather than fewer, depending on where an advisor works.

SEC enforcement might be more familiar to advisors

For the most part, investors with ERISA protections can sue in federal court if their fiduciary fails to act in their best interests. But the SEC regulates advice pursuant to the Investment Advisers Act of 1940, which does not generally allow investors a court remedy, except in some unusual cases.

Although ERISA doesn’t generally apply to IRAs, certain parts of the Internal Revenue Code do, which gave the Labor Department the authority to decide what would constitute a prohibited transaction. The department used this authority to set up a contract-based enforcement mechanism, which would allow investors to sue their advisor for breaching best-interest standards. (To the sticklers out there: Yes, the Labor Department got this authority from Reorganization Plan No. 4 of 1978, and not directly from ERISA.)

Most advisors are used to dealing with the SEC already, which may be comforting. Further, without the uncertainty of lawsuits, it may be much easier to prepare to demonstrate compliance with whatever rule the SEC comes up with. But investors might be worse off, depending on the specifics of the rule.

SEC standards are more likely to rely on disclosures

The DOL’s fiduciary rule did not ban commissions. However, it created a more complex process for advisors who do accept them than advisors who charge a level fee on assets under management. We would expect a uniform advice standard from the SEC to have a more equal treatment of broker/dealers, who accept commissions, and RIAs, who often operate under a fee-based model instead.

We don’t know exactly what the SEC will propose. But it seems likely that the commission would rely on increased disclosures, as opposed to making it difficult to accept compensation that could create a conflict of interest. This is partly because there are only so many tools in the government’s toolkit. And if the SEC is not going to ban or impede payments that could create a conflict of interest, then they need to rely on disclosures. Plus, the commission has always viewed disclosures as one of the main ways to protect investors and maintain efficient and fair markets.

The SEC fiduciary rule could require documentation for retirement rollovers

I hate to prognosticate because we could see a proposed rule soon. But, I strongly suspect that the SEC will somewhat mirror one of the fundamental features of the DOL fiduciary rule: requiring advisors to document the reasons why rolling over a 401(k) to an IRA is in a client’s best interest.

Of course, the SEC requirements may be different (and perhaps more explicit, which might be nice). But my rationale for this is that both FINRA and SEC have said that ensuring rollovers are reasonable and based on various relevant factors are a priority in recent years. And assuming that the SEC intends to create more protections for investors (but perhaps fewer than what DOL has proposed), it seems very likely that a focus on rollovers would be expanded, not contracted.

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